Higher/lower

Dividend irrelavnce theory/ information (signaling)/ catering

Clientele / information (signaling) / catering

Clientele / information (signaling) / catering

However, the Tax Code encourages many individual investors to prefer capital gains to dividends. Taxes must be paid on dividends the year they are received; however, taxes on capital gains are not paid until the stock is sold. Due to time value effects, a dollar of taxes paid in the future has a -Select- $ effective cost than a dollar of taxes paid today. An increase in the dividend is often accompanied by an increase in the stock price, while a dividend cut generally leads to a stock price decline. This observation led to the -Select- theory, which states that investors regard dividend changes as indicators of management's earnings forecasts. Managers often have better information about future prospects for dividends than public stockholders, so there is some information content in dividend announcements. A firm should consider these effects when it is contemplating a change in dividend policy. The -Select- effect is the tendency of a firm to attract a set of investors who like its dividend policy. Firms have different groups of investors and they have different preferences, so a change in dividend policy might upset the majority group and have a negative effect on a firm's stock price. Therefore, a company should follow a stable, dependable dividend policy. Some recent research related to behavioral finance suggests that investors' preferences for dividends vary over time. The -Select- A theory suggests that investors' preferences for dividends vary over time and that corporations adapt their dividend policies to cater to the current desires of investors